Behavioral scientists and practitioners’ guiding light has always been “Nudge for good,” keeping consumers’ best interests at heart, much as the fledgling Google set out to do with “Don’t be evil.” Yet there is a darker side of nudging, commonly referred to as sludge.
Sludge was defined by Richard Thaler, winner of the 2017 Nobel Prize in economics, who, together with Cass Sunstein, is best known for the term nudge. Sludge highlights how companies and organizations can and are taking advantage of innate consumer traits and fallibilities, such as inertia and inattention, knowing that they can profit from consumers’ weaknesses and biases.
The term is used to define and draw attention to companies and institutions that use behavioral science and nudges in ways that hurt, rather than promote, the welfare of consumers. Thaler recently defined two types of sludge:
“Sludge can take two forms. It can discourage behavior that is in a person’s best interest such as claiming a rebate of tax credit, and it can encourage self-defeating behavior such as investing in a deal that is too good to be true.”
Sludging encompasses things like hidden add-ons, long and confusing fine print, misleading messages that put psychological pressure on buyers to purchase, hidden subscriptions, or bureaucratic red tape, such as large amounts of unnecessarily complex paperwork.
Sludging encompasses things like hidden add-ons, long and confusing fine print, misleading messages that put psychological pressure on buyers to purchase, hidden subscriptions, or bureaucratic red tape, such as large amounts of unnecessarily complex paperwork. For example, a company might add sludge to make it difficult to return a faulty product; by making it confusing or complex to start or complete the returns process, the company makes it less likely a dissatisfied consumer will complete the return. Or it might leverage social norms—our tendency to conform to what others have done—to persuade us to purchase something, by misleadingly highlighting how popular it is with customers. Or it might use a default to automatically renew a subscription or insurance premium without fully informing us of the renewal. In short, sludge is any measure which makes it harder for a consumer to do what’s in their best interest.
Thankfully, regulators and other organizations are realizing the need to monitor, minimize, or even stop these practices—acting as a type of “behavioral economics police” (BE police) to protect consumers from a deluge of sludge. This is a radical new approach; previously, regulators tended to rely on the concept of full disclosure and assumed that, as long as companies provided full terms and conditions for a product or service, consumers were protected from wrongdoing. Behavioral science has demonstrated why that isn’t sufficient and has offered an alternative that takes consumers’ biases and fallibilities into account.
BE police have two roles:
The detective: Here, regulators investigate and uncover where companies might be using unethical practices to nudge suboptimal behavior among their customers. In doing so, BE police are making consumers more conscious and aware of the ways they may be taken advantage of.
The lawmaker: Where companies and institutions are exploiting consumer errors (prompted by innate biases), regulators use behavioral science first as a guiding framework, to analyze the context, and then as a way to design guidelines or policies that ensure these errors can’t occur. Further, behavioral science is helping regulators understand consumer biases and adapt industry regulations to account for them.
This article delves into the first of these two types of BE policing. We illustrate it with a new example from the U.K. regulator, the Competition and Markets Authority, which recently launched an investigation into hotel-booking sites.
The Regulator as BE Detective
The U.K.’s Competition and Markets Authority (CMA) has already conducted many industry investigations grounded in behavioral science.
For example, in the airline industry, the CMA are aware of the effects of “drip pricing,” where consumers may be initially attracted to the headline price and underestimate the cost of add-ons. In 2012, concerns about this led the CMA to take action on some airline payment surcharges (typically only revealed at the end of the online booking process).
They have also restricted the number of gas and electricity price tariffs a consumer will be offered, aware that information overload or too many options can often lead to confusion, decision fatigue, and poor choices.
Thankfully, regulators and other organizations are realizing the need to monitor, minimize, or even stop these practices—acting as a type of “behavioral economics police” to protect consumers from a deluge of sludge.
Large discounts in price are extremely attractive, because buyers feel they’re getting a good deal. Retailers have long exploited the consumer tendency to anchor on price, particularly to use previous prices as a reference point. Industry research by the CMA found that some sectors, such as furniture retailers, were advertising false discounts based on recommended retail prices, which had not been previously been sustained.
More recently, the CMA announced a new investigation into hotel-booking websites, questioning whether sludge techniques are pushing consumers into making a hotel booking more quickly or more readily than they may otherwise have done. Of the two types of sludge outlined by Thaler, this type falls into the camp of encouraging self-defeating behavior. The CMA are concerned that consumers are not actually getting the deals they believe they are getting. Andrea Coscelli, CEO of the CMA, explains:
“Booking sites can make it so much easier to choose your holiday, but only if people are able to trust them. Holidaymakers must feel sure they’re getting the deal they expected, whether that’s securing the discount promised or receiving reliable information about availability of rooms. It’s also important that no one feels pressured by misleading statements into making a booking. That’s why we’re now demanding that sites think again about how they’re presenting information to their customers.”
So what hotel-booking practices exactly are the CMA claiming are unfair—or, in Thaler’s words, sludge?
Ranking and ordering of hotel search results: The CMA are concerned how hotels are ranked after a customer has entered their search requirements. After inputting a search, results are immediately listed in a certain order. The CMA speculate that some sites may be listing results according to the amount of commission a hotel pays the booking site, rather than more consumer-friendly ordering, such as low to high price or best-rated by people who have stayed at the hotel. Even worse, these listings may be displayed un-transparently as “top picks,” leveraging the supposed authority and expert viewpoint of a booking site. Therefore, ordering effects may impact consumers’ choices; most of us typically don’t have the time or energy to trawl through every listing, inspecting each hotel out of often 50 plus options, and are more likely to opt for listings higher up the page. Research into online search behaviors often shows we rarely make it to even the second page of search results.
Pressure selling: You’ve likely experienced those hover messages that flag up on hotel (and increasingly, airline and other travel) booking sites during your search, saying things like, “Only 2 rooms left!” or “10 people looking at this room right now!” or “In high demand” or “307 people are looking for a place to stay in Vienna. They’re searching for the same dates as you” or “This is a rare find—this place is usually booked,” often in very salient colors, such as red. These techniques, known as pressure selling, leverage concepts from behavioral science, such as scarcity bias (we tend to be attracted to something in short supply) and social norms (we tend to conform to what the majority of others are doing or have done before us, especially for choices that are unfamiliar, such as booking a hotel in a new location). The CMA is concerned with whether such claims create a false impression of room availability or popularity and consequently rush consumers into making a booking decision.
Discount claims: Some hotel-booking sites make use of what’s known as anchoring to the rack price, offering a slashed price. For example, “Was £210 per night, now only £149!” The CMA want to look at whether such discount claims offer a fair comparison for customers or are misleading. For example, the claim could be based on a higher price that was only available for a brief period, or not relevant to the customer’s search criteria, such as comparing a higher weekend room rate with the weekday rate for which the customer has searched.
Supermarkets have also been criticized for this (for example, in the dynamic pricing of Easter Eggs or products on sale for Black Friday.) According to behavioral science, this practice is worrying because people tend to anchor to a price, using it as a reference point, especially in the event of no other comparison points. Travelers, business or leisure, are at a disadvantage, since they are often unfamiliar with the hotel prices at their destination or at that time of year; they may latch onto irrelevant and possibly untruthful prices too willingly, even if only subconsciously.
Hidden charges: Last, the CMA are concerned about the extent to which sites include all costs in the price they first show customers or whether people are later faced with unexpected fees, such as taxes, booking fees, or, in one of our cases, valet parking fees, which were hidden in small print at the time of booking when there were no other parking options available. This is a concern, because behavioral science shows that this type of pricing takes advantage of frequent consumer inertia. Buyers may have made their initial choice between hotels based on these incomplete prices, leading them to choose somewhere that may not have been the cheapest. Once headed down the path to booking, on encountering an unexpected additional cost, we may be less likely to change our choice and start over. It’s an added hassle and time cost; plus, it’s hard to compare apples with oranges—another provider may have different add-ons, and we might struggle to recall and do the math to work out how the final prices really compare.
The CMA is one of the few leading the way here, and it will be interesting to see what it concludes in its investigation and then how far it will be able to regulate. What is certain is that these types of investigation will catch the attention of any company or organization engaged in similar practices in other sectors, likely sending them running to eradicate those practices before they get into formal trouble.
While behavioral science is, for the most part, being put to good use across a range of sectors and purposes, it can be leveraged to take advantage of consumers. However, in many cases, regulators and other institutions, the BE Police, have succeeded in arming themselves with the new tools that behavioral science offers to combat so-called sludge.
Equipped with an understanding of behavioral science and the effect of biases on consumers, the BE police are able to conduct deep analysis and design more effective policies with the protection of consumers as the driving force.
Thaler urges: “Let’s continue to encourage everyone to nudge for good, but let’s also urge those in both the public and private sectors to engage in sludge cleanup campaigns. Less sludge will make the world a better place.”